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Research Center : Article

Nov 29,2006 | Mercer Human Resource Consulting

GRIST Report: Section 162(m) 'Negative Discretion' May Require Variable Accounting for Share Plans

A common feature of incentive plans, negative discretion provisions let compensation committees use subjective criteria to reduce otherwise objectively determined awards, without violating the performance pay exception to the Code section 162(m) limit on deductible compensation. These provisions might, however, create unwelcome accounting results if used in performance-based equity plans. According to some accounting firms, the possibility that a compensation committee will exercise negative discretion suggests that the FAS 123(R) grant date does not occur until the committee decides whether to use its discretion – so variable accounting applies until that time. After introducing the key concepts, this article analyzes the accounting issues and outlines steps companies may wish to take to avoid adverse accounting.

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